Lieutenant General Frank Helmick said the lack of funds for defence would affect not only the acquisition of military equipment, but also any increase in the number of Iraq's soldiers, sailors and airmen.

"The budget, no question, is a challenge," said Helmick, outgoing commander of the American and NATO mission charged with training Iraq's security forces.

"It's a challenge in 2009, and it will be a challenge in 2010, based on the oil prices," he told a news conference.

"This is a significant challenge for the security ministers as they try to procure weapons systems as well as ensure that the personnel flow is maintained as we try to grow" Iraq's armed forces.

Iraq's 2009 budget, prepared in cooperation with the International Monetary Fund, was initially based on an estimated oil price of around 62.50 dollars a barrel but later had to be pared back when crude prices fell.

A 58.9 billion-dollar spending programme based on an oil price of 50 dollars a barrel was passed in March, with a projected budget deficit in excess of 20 billion dollars.

Prime Minister Nuri al-Maliki said in June that Iraq might be able to boost government spending thanks to rising prices, which currently stand at around 65 dollars a barrel, and recent increases in production capacity.

Around 86 percent of Iraq's government revenues are from oil sales.

Iraq is seeking to rebuild its moribund economy and dated infrastructure, which have been wracked by decades of sanctions and war, which limits funds available for defence.

Helmick said the crunch would affect expansion of "support units, logistics units and the additional people that we'll need for the navy and the additional people that we'll need for the air force as we move into the future".

"There's no question that the budget will be a factor."

He said that Iraq's navy was unable to keep the country's oil platforms or its territorial waters secure, and its air force "needs some time to help defend their airspace."

Helmick insisted, however, that he was "fairly confident that the Iraqi security forces will be able to provide the security that this country needs for the population inside the country."

"I think we're on the right path," he added.

US troops withdrew from Iraq's cities and towns on June 30 as part of a security agreement between Baghdad and Washington that requires all American combat forces to leave Iraq by mid-2010, and all US troops to depart by the end of 2011.

"My frustration is that we have a window of time, December 2011, to do the absolute best that we can, and my frustation always is I think we should do more with the Iraqis," he said.

"We don't have all the time that we thought we would have to do things, so everything is compressed now, and we have to make decisions to move forward."

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